The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model

We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus. We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not. We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria. Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 35 percent and lowers producer profits by about 20 percent. Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level. This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.

Network Externalities and Technology Adoption: Lessons from Electronic Payments

We seek to analyze the extent and sources of network externalities for the automated clearinghouse (ACH) electronic payments system using a quarterly panel data set on individual bank adoption and usage of ACH. We provide three methods to identify network externalities using this panel data. The first method identifies network externalities from the clustering of ACH adoption. The second method identifies them by examining whether banks in areas with higher market concentration or larger competitors are more likely to adopt ACH. The third method identifies them by examining whether the ACH adoption by small branches of large banks affects the adoption by local competitors. Using fixed effects and panel data these methods separately identify network externalities from technological advancement, peer-group effects, economies of scale and market power. We find evidence that the network externalities are moderately large.

Dynamics of Consumer Demand for New Durable Goods

Most new consumer durable goods experience rapid prices declines and quality improvements, suggesting the importance of modeling dynamics. This paper specifies a dynamic model of consumer preferences for new durable goods with persistently heterogeneous consumer tastes, rational expectations, and repeat purchases over time. We estimate the model on the digital camcorder industry using panel data on prices, sales and characteristics. We find that the one-year elasticity in response to a transitory industry-wide price shock is about 25% less than the one-month elasticity. Standard cost-of-living indices overstate welfare gain in later periods due to a changing composition of buyers.

Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model

Will an industry with no antitrust policy converge to monopoly, competition, or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers, and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model, and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price, through monopolization is limited. Additionally, as the discount factor increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.

Inferring Hospital Quality from Patient Discharge Records Using a Bayesian Selection Model

This paper develops new econometric methods to estimate hospital quality and other models with discrete dependent variables and non-random selection. Mortality rates in patient discharge records are widely used to infer hospital quality. However, hospital admission is not random and some hospitals may attract patients with greater unobserved severity of illness than others. In this situation the assumption of random admission leads to spurious inference about hospital quality. This study controls for hospital selection using a model in which distance between the patient's residence and alternative hospitals are key exogenous variables. Bayesian inference in this model is feasible using a Markov chain Monte Carlo posterior simulator, and attaches posterior probabilities to quality comparisons between individual hospitals and groups of hospitals. The study uses data on 77.937 Medicare patients admitted to 117 hospitals in Los Angeles County from 1989 through 1992 with a diagnosis of pneumonia. It finds higher quality in smaller hospitals than larger, and in private for-profit hospitals than in hospitals in other ownership categories. Variations in unobserved severity of illness across hospitals is at least a great as variation in hospital quality. Consequently a conventional probit model leads to inferences about quality markedly different than those in this study's selection model.

Intermittency and the Value of Renewable Energy

A key problem with renewable energy is intermittency. This paper develops a method to quantify the social costs of large-scale renewable energy generation. The method is based on a theoretical model of electricity system operations that allows for endogenous choices of generation capacity investment, reserve operations, and demand-side management. We estimate the model using generator characteristics, solar output, electricity demand, and weather forecasts for an electric utility in southeastern Arizona. The estimated welfare loss associated with a 20% solar photovoltaic mandate is 11% higher than the average cost difference between solar generation and natural gas generation. Unforecastable intermittency yields welfare loss equal to 3% of the average cost of solar. Eliminating a mandate provision requiring a minimum percentage of distributed solar generation increases welfare. With a $21/ton social cost of CO2 this mandate is welfare neutral if solar capacity costs decrease by 65%.

Why Do Incumbent Senators Win? Evidence from a Dynamic Selection Model

Since 1914, incumbent U.S. senators running for reelection have won almost 80% of the time. We investigate why incumbents win so often. We allow for three potential explanations for the incumbency advantage: selection, tenure, and challenger quality, which are separately identified using histories of election outcomes following an open seat election. We specify a dynamic model of voter behavior that allows for these three effects, and structurally estimate the parameters of the model using U.S. Senate data. We find that tenure effects are negative or small. We also find that incumbents face weaker challengers than candidates running for open seats. If incumbents faced challengers as strong as candidates for open seats, the incumbency advantage would be cut in half.

Quality and Employers' Choice of Health Plan

We seek to understand the relationship between employer decisions regarding which health plans firms choose to offer to their employees and the performance of those plans. We measure performance using data from the Health Plan Employer Data Information Set (HEDIS) and the Consumer Assessment of Health Plan Survey (CAHPS). We use a unique data set that lists the Health Maintenance Organizations (HMOs) available to, and offered by, large employers across markets in the year 2000, and examine the relationship between plan offerings, performance measures and other plan characteristics. We estimate two sets of specifications that differ in whether they model plan choice as a function of absolute plan performance or plan performance relative to competitors. We find that employers are more likely to offer plans with strong absolute and relative HEDIS and CAHPS performance measures. Our results are consistent with the view that large employers are responsive to the interests of their employees.

Do mergers lead to monopoly in the long run? Results from the dominant firm model

Will an industry with no antitrust policy converge to monopoly, competition or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price through monopolization is limited. Additionally, as the discount rate increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.Consolidation and merger of corporations